JYNT - The Joint Corp.'s Q2 Was Not As Gloomy As It Seems

2023-10-18 14:22:26 ET

Summary

• JYNT's Q2 2023 results show growth in revenue, total clinic count, and system-wide sales. The company is still expanding, opening new clinics and selling franchise licenses.
• The management aims to improve efficiency moving forward.
• JYNT is investing in infrastructure and marketing, but profitability remains a concern.

The Joint Corp. ( JYNT ) stock has been crushed recently. Despite the short-term pessimism in its stock price, the long-term story is packed with growth and reasonable management moves. As I have covered in the previous article from May, JYNT has the geographical monopoly, scale advantage and marketing capabilities to help them outperform competitors. After Q2, I think those qualities are still intact and there are lots of strength moving forward for JYNT. In the following analysis, I will highlight how it could deliver good return for shareholders

Business Update

Although JYNT's stock price has seen a decline recently, the financial performance from Q2 2023 announced on September 13th show promise. With a revenue increase of 18% amounting to $29.3 million, and a significant bump in total clinic count to 890, the trajectory is upward. The operational loss was trimmed down to $375,000 from last year's $1.3 million, showcasing better financial control. System-wide sales grew by 13% reaching $120.1 million, with a system-wide comp sales of 5%. The Adjusted EBITDA saw a hike, standing at $3.2 million against the previous $2.6 million.

Overall, despite a decrease in business activity, JYNT maintains its stability by consistently selling licenses to franchises and attracting new members, leading to increased foot traffic. Moreover, it continues to hold one of the lowest close rates among franchisers. The absence of future regional developer involvement on new clinics is expected to further enhance the take rate.

JYNT is Still Growing

In a clear display of growth, 2 1 franchise licenses were sold, marking an increase from 17 in Q1 2023 and slightly lower than 24 in Q2 2022. The quarter saw the opening of 23 franchised clinics along with three company-owned or managed greenfield clinics, totaling 26 new clinics. Although lower than the 34 new clinics of Q2 2022, the trajectory remains positive. The closure rate remains low, with only four franchised and two company-managed clinics closing. By mid-September, 19 additional franchised clinics and two greenfield clinics were opened, soaring the total clinic count to 911. CEO Peter Holt 's remarks on the enduring pain epidemic driving individuals towards more natural, holistic treatments, hint at the sustained demand and growth space for chiropractic care and JYNT.

The Business Machine is Still in the Making

The cost of revenue saw a slight uptick to $2.6 million from $2.3 million in Q2 2022, aiding in pushing the gross margin to an impressive 91% (chart below). The franchise model is proving to be lucrative.

JYNT is still in an investment phase, especially in marketing, franchisee support, and customer management infrastructure. The absence of a patient app and portal signals ample room for enhancement and spending which also hurt profits. Q2 2023 Expense s in selling and marketing shot up by 23%, driven by the advertising demands of an expanding clinic count. The increase in depreciation and amortization expenses by 59% for Q2 2023, mirrors the growth in greenfield clinics and acquisitions of franchised clinics. With G&A expenses at $19.9 million, up from last year's $18.6 million, JYNT struggles on supporting clinic growth amidst a competitive labor market.

Profitability: Not as Dire as it Appears

I think recent price drops were triggered by two key factors: accounting issues linked to regional developers, which have been resolved as there is no cash impact on the business, and concerns over diminishing profitability. Despite a 1% decrease in comp sales for > 48 months, the macroeconomic challenges plays a part, as reflected by Cardlytics’ 3% decline in overall consumer spending in retail during Q2 (based on all bank transaction data). The high gross margins and CEO Peter Holt's commitment to cost reduction showcase a promising profitability outlook. Preliminary steps like evaluating the corporate portfolio and culling around 10% of owned or managed clinics (bad location or rundown anchor store) indicate a pragmatic approach towards refining quality and responsible growth. I think these are good moves to protect shareholder money.

Small Cap Skepticism: An Unfounded Fear for JYNT

The prevailing negative sentiment around JYNT and small-cap entities largely stems from uncertainties in fundamental performance amidst inflation and rising interest rates. The current market favoritism towards the 'magnificent seven' (Google, Amazon, Nvidia, etc.) with stable business models, clear growth prospects, and predictable cash flows, contrasts the skepticism surrounding small-caps (some are zombies). JYNT boasts a tangible storefront business with real customers and minimal debt. The current low profitability is poised for a turnaround as JYNT tightens its spending belt, heralding a promising financial vista moving forward.

Besides the overall market risks, JYNT is feeling the heat from tight labor markets and pricing hurdles. There are also threats from other therapy technology improvements that may undermine Chiropractic as a physical treatment option. It's crucial to keep an eye on how the management reins in its sales and marketing spend, as those budgets can spiral quickly.

Bottom Line

Overall, JYNT appears to be a compelling opportunity for shareholders seeking long-term value. While the short-term loss may continue, the long-term value proposition is robust. Despite a downward revision in revenue guidance to $115M - $118M from the previous $123.0M - $128.0M, the growth outlook remains strong at 14%-18%. The anticipated opening of 100 to 120 franchise clinics should add more scaling strength for the brand. A strategic focus on cost containment and clinic profitability enhancement should help profit margin. After the completion of their investment in marketing infrastructure, a 20% EBITA margin seems reasonable for JYNT. With a five-year horizon, the projection of around 1500 stores generating $200M in revenue, and a resultant $40M EBITA, seem very achievable. This stems from JYNT's dominant scale, cost leverage, and robust geographical expansion prowess. The market might be missing out on this growth forecast since chiropractic care hasn't fully recognized by the public yet. The current enterprise value of $134M, merely a 3x multiple of the forward EBITA, underscores a compelling undervaluation narrative. Hence, gauging by its anticipated future earnings power, a fair value estimation of 312M for JYNT seems reasonable to me.

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